Commentary

China, Russia and the eternal emerging markets

Commentary: There's a reason they never emerge

DavidCallaway

SAN FRANCISCO (MarketWatch) -- A fund manager at an emerging markets conference I covered more than a decade ago delivered a warning to investors infatuated with those markets that aged well.

"Did anyone ever notice that the emerging markets of the 1990s are the same emerging markets of the 1890s?" he said to a surprised audience.

Indeed, despite the growth and modernization of China, Russia, Brazil, India, Mexico, Malaysia and many others, they have always been considered emerging markets, pockets of opportunities for investors and companies willing to brave the political, cultural and social challenges they present.

I'm reminded of the fund manager's quote again this week while watching Google
GOOG, +0.42%
pull back from China and ConocoPhillips
COP, -0.62%
cut its exposure to Russia by halving its stake in the country's second-largest oil firm, Lukoil.

Usually it's just the corruption in these markets that makes it a waste of time for a Western investor or company to get involved directly, and that corruption sometimes stems from a weak or corrupt government. In China's and Russia's cases, however, it's less about corruption and more about government control.

The China growth story, which has dominated global markets for much of the past decade, won't die because of the Google incident. For every Google there will be 20 Yahoos
YHOO
willing to look the other way from negative publicity or the local humiliations of dealing with the Chinese government to pursue profit crumbs from the growth-story feast. But some companies will hold back and reconsider whether it's worth the effort, and that number could grow if incidents such as the Google one keep cropping up.

GoDaddy.com, an Internet domain name registry company, said Wednesday it would stop offering new China, or ".cn" domain registrations in the country because of new government restrictions on information about companies that want to register. So count Danica Patrick out of doing any GoDaddy promotions there anytime soon. Who will be next?

In Russia, the inconsistency of the government in dealing with business partners and investors, particularly in the country's volatile energy sector, has led to a parade of investors and companies throwing up their hands over the years, with ConocoPhillips only the latest. TNK-BP, the joint venture between Russian business interests and the former British Petroleum, is also reportedly cutting some of its business with the country's energy sector, following more government intervention in the industry and a scandalous series of episodes a few years back tied to local bullying of BP's senior representatives in the venture.

This is not to say that these countries have cornered the market in corruption and government heavy-handedness. Our own Western markets can be just as crooked, as we're seeing play out now in the U.K. insider-trading case and the hedge fund cases in the U.S. And our governments, with their increasingly protectionist rhetoric, won't shy away from doing something stupid or anti-business to foreign investors either, given half a chance.

But the Western markets, with their transparency, or at least perceived transparency and freedom, still offer safer waters for the international investor or company. They may indeed be obstacle courses, but they're not minefields.

Also, there's no shortage of ways to make money in the emerging markets without having to do direct business. Exchange-traded funds investors and emerging markets investors, to say nothing of commodities investors, have made mints in the past two years on booming markets in Russia, China and Latin America.

Those investments, however, also rely on the perception of those places as good markets to do business. Every Google example or TNK-BP example that prick the carefully choreographed song and dance these emerging markets offer to investors -- and there will be more -- hurt those perceptions.

And each time the host country sounds off in its own defense, usually in heated statements or ill-conceived speeches, investors are shaken loose from the siren sound of the story line and reminded of the real character of the place or the people that have their money. Despite their growth and enormous footprint on the world stage, markets such as China and Russia will always be regarded as emerging markets as long as they refuse to emerge as safe and fair places to do business.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.